Alternative view: The Dutch mortgage market from an international perspective

David van Bragt, Consultant Investment Solutions

Aegon Asset Management

22 mei 2018

An increasing number of investors are looking at the opportunities that direct mortgage investments around the world can offer to their search for yield. However, each country has its own specific circumstances and regulations that drive the housing and mortgage market. The question then arises: how does the Dutch mortgage market compare to other major mortgage markets? Understanding the similarities and differences will help investors to decide which mortgage market offers the risk-return profile they are aiming for.

This article focuses on various aspects of mortgage markets: home ownership rate, size of the mortgage market, house price developments, mortgage rates, mortgage risks, mortgage product design, and mortgage market support. In comparison to other countries, the large number of social housing corporations in the Netherlands, which provide affordable rental housing for the lower incomes, has led to a relatively low home ownership rate. The Dutch mortgage market is nevertheless large and well developed, and supported by households with, on average, a high net worth.

The underlying house prices in the Netherlands have performed close to the average in the long run, as compared to an international sample. The financial crisis led to a significant correction, but house prices have recovered after 2013. Despite this house price volatility, mortgage arrears and defaults are still very low for the Dutch market.

Additional restrictions on mortgage lending have been imposed by the Dutch government in recent years, leading to lower risks going forward. Also typical for the Dutch market is the "Nationale Hypotheekgarantie" (NHG) structure that provides credit protection to mortgage lenders.

The shift from banks, as the traditional funders of mortgages, towards insurance companies and pension funds is apparent in the Netherlands. Especially medium- and long-term Dutch mortgages are being financed more and more by pension funds or insurance companies in recent years. The figures below compare Dutch mortgage rates with mortgage rates in other countries and the euro swap rate.

Dutch mortgage investments clearly offer an attractive return for institutional investors, compared to other large euro-denominated mortgage markets. These investments can also be incorporated well in existing liability matching portfolios, for example as an alternative to sovereign or credit bonds.

ConclusionsWe have put the Dutch mortgage market in a broader, international perspective. Understanding the similarities and differences will help investors to decide which mortgage market offers the risk-return profile they are aiming for.

In general, the Dutch mortgage market compares well with other mortgage markets in terms of size, level of development, risk, product design and government support. For investors, expected returns are also attractive compared to other euro markets or the market swap rate. As a consequence, part of the mortgage funding by banks has been taken over in recent years by institutional investors as pension funds or insurance companies.

The Netherlands is a below-average country with respect to home ownership but has a large and well-developed mortgage market, which is supported by households with a high net worth.

The Dutch mortgage rate is attractive for investors compared to other large euro-denominated mortgage markets.

Mortgage arrears and defaults are very low for the Dutch market. Additional restrictions on mortgage lending have been imposed by the Dutch government, leading to lower risks going forward.

Also typical for the Dutch market is the "Nationale Hypotheekgarantie" (NHG) structure that provides credit protection to mortgage lenders.